Investors who want to prosper think long term

Live long and prosper,” Leonard Nimoys character Spock, from the original Star Trek, liked to say. Investors—especially the media-bombarded impatient types of today—should take that adage to heart, perhaps substituting the word “Invest” for the word “Live.” In an era of second-by-second market updates readily available on cable TV and the Internet, investors seem to be having trouble with the concept of long term investing.

One major cable station starts out its morning financial coverage with a segment called “Trade of the Day.” Investors check their account balances daily, even hourly, online. Is this any way to make money? Clearly not: the markets can fluctuate widely and violently day-to-day and week-to-week. These fluctuations, however, mean nothing in the long term and tell you very little about the future. A smart investor shouldn’t worry about tomorrow’s account balance or how much he or she is likely to make or lose this year. Instead, the investor should be pumping every dollar possible into the market so that 15 or 20 years from now he or she can have bragging rights over the ensuing profits.

It doesn’t matter that the Dow Jones Industrial Average started 2005 at 10,783 and that it is below that level now. What matters for a long-term investor is that the Dow was at 1,198 at the start of 1985. Wouldn’t you have liked to have invested then and seen your money grow by 800%?

A smart investor is focused on 2025, not 2005. Where could the Dow be by then? Roger Ibbotson, a Yale professor and respected investment researcher, has predicted that the Dow would be over 100,000 in 20 years. Back in 1973, when the Dow was only 850, Ibbotson predicted the Dow would hit 10,000 in 1999. The Dow closed above 10,000 for the first time in March 1999. Ibbotson has predicted a median return of 11.6% per year for the big stocks that make up the Dow and that prediction underlies his forecast of a Dow above 100,000 by 2025.

What if returns are less? A 6% average annual return over the next 20 years will still boost the Dow to nearly 35,000 by 2025. That low return would still triple an investor’s capital. The lesson: ignore today’s market movements, put your money to work, and then sit back and relax and let the market take its course.